What you need to know about Ontario’s 2016 Budget

February 26, 2016

Yesterday, the government of Ontario released its 2016 Budget: Jobs for Today and Tomorrow. In the spirit of the Oscar weekend, we’ve taken an award-winning approach to analyzing the Budget. The first part of this blog provides a snapshot of Ontario’s fiscal situation. The second part takes a look at policy initiatives.

Part 1: Ontario’s fiscal situation

A red carpet affair

Ontario is in the red. The province is expecting a deficit of $5.7 billion in 2015-16, which is a $2.8 billion improvement from fall 2015’s projection. There are a number of factors, mostly external to the province, that contributed to this improvement.

The government reduced its reserve from $1 billion down to $150 million, automatically improving the budget balance by $850 million.

Thanks to prevailing low interest rates, the interest on debt was only a whopping $11.2 billion, rather than $11.41 billion. These first two factors helped the balance sheet by over $1 billion dollars.

The government actually overspent on its programs by $0.4 billion.

The government enjoyed higher revenues than expected, but not because of smart policy. Stronger than expected economic growth was driven by a weak Canadian dollar, a significant drop in oil prices, strong growth in the US, and prevailing low interest rates. The government itself admits that these four factors contributed to Ontario’s GDP growth (Budget 2016, p. 243). These four factors generated approximately 2.7 percent real GDP growth in the province (using the government’s midpoint estimates); it is these external factors that are to thank for the $2.16 billion (or 1.73 percent) increase in 2015-16 revenues.

Who’s paying for this dress?

The government touts fiscal restraint and reminds every Ontarian that they receive less program spending than citizens of every other province. Despite this, net debt has increased every single year for the past fifteen years, and has reached $296.1 billion.

Clearly, the province has a revenue generation problem - Ontario collects less revenue as a percentage of its GDP than every single province, except for Alberta. To address this gap, Ontario must come up with a more effective revenue-generation strategy. On one hand, efforts to tackle the underground economy have generated $930 million in new revenue over the past 3 years. On the other hand, the government is selling-off shares of Hydro One, a revenue-generating asset. According to the financial Accountability Officer, this will reduce revenues by about $400 to $800 million per year, starting in 2017-18.

Thanks to those who made this all possible

Let’s put two and two together. The government has no plan to pay off its debt and is banking on a growing economy to reduce the debt-to-GDP ratio. Even if the budget does balance in future years, the government will still be digging a hole as it continues to spend off-the-books on infrastructure.

The government has not given up on its promise of balancing the budget by 2017-18. In the absence of smart policy, we must cross our fingers and hope that external factors continue to lean in the province’s favour. If any of these factors change, we can expect to see some more red.

Part 2: Ontario’s policy initiatives

The stars are out

Here we assess the 2016 Budget according to the government’s “four-part-plan.” This is to create an environment where business thrives, make the largest public infrastructure investment, invest in people’s talents and skills, and build a secure retirement savings plan.

Worst attempt at creating a culture conducive to business growth

Ontario is taking two major steps to create a culture conducive to business growth. First, the Jobs and Prosperity Fund is expanding to subsidize firms that commercialize and adopt disruptive technologies. But subsidies are not the best way to foster business growth. In Working Paper 21, Open for business, we found that the overarching economic environment has a much greater influence. We suggest Ontario strengthen its fundamental economic characteristics by modifying the small business deduction and broadening airline operations. With regards to the Jobs and Prosperity Fund, Ontario should prioritize productivity enhancements and co-finance employee training. All of this information should be made public.

Second, the province wants to help Ontario’s businesses scale up. The government will establish a Strategic Investments Office to serve as a one-stop shop for business investment services. The province will also launch an online portal to help firms navigate existing public supports. This is long overdue. In Working Paper 23, A place to grow, we found that the government of Ontario funds 127 initiatives for provincial businesses, several of which claim to be one-stop shops, but many are duplicative and uncoordinated. This wastes businesses’ resources and signals that Ontario is not a place to grow. (You can find a list of these programs here.)

Most ground-breaking infrastructure investments

Budget 2016 increases Ontario’s infrastructure investments from $134 billion, announced in Budget 2015, up to $137 billion over a 10-year period. Additional funds are being directed towards expanding the Community Infrastructure Fund, investing in new highway projects, and improving hospitals.

In Working Paper 22, Better foundations, we analyzed the relationship between labour productivity and 11 different types of infrastructure. The results? Health care infrastructure has a positive impact on productivity – these investments should be prioritized. Unfortunately, further investment in highways has a negative impact on labour productivity. Ontario should restrict, not expand, new funding for highways. This is especially important as the province transitions to a low-carbon, less car dependent economy.

Best crack at evidence-based policy

Greater financial assistance for postsecondary education is a targeted and cost-effective solution to build a strong workforce. Streamlined government programs further ensures people don’t fall through the cracks. Training supports for those already in the labour force is also important. In Budget 2016, Ontario proposes to cover tuition for students from families with incomes of $50,000 or lower. The province will also combine student grants and loans to create a single major upfront grant, the Ontario Student Grant.

On employment and training, the province spends about $1 billion on such programs for 1 million Ontarians. But most of these programs were developed before Y2K and may no longer be appropriate for today’s labour market. As a result, the government will launch the Ontario Centre for Workforce Innovation to support research. Lastly, the province is piloting Local Employment Planning Councils in eight communities. This will bring together policymakers, employers, delivery agencies, and trainers to address Ontario’s skills gap. Long story short, Ontario’s plan to invest in people and skills makes the cut.

Greatest policy suspense

Ontario’s plan to strengthen retirement security is on pause. The province is participating in a national discussion to enhance the Canada Pension Plan (CPP), while addressing concerns that businesses have raised about the Ontario Retirement Pension Plan (ORPP). Nevertheless, Budget 2016 confirms that all eligible provincial workers will be covered by the ORPP or a comparable workplace plan by 2020. Look out for legislation this spring, which will discuss employer eligibility requirements, benefit calculations, as well as the compliance and enforcement regime.

In our debut Quarterly Report, Bold choices for Ontario, we presented four primary concerns with the ORPP. The policy could reduce wages and employment, erode Ontario’s competitiveness, disregard individual preferences, and fail to address the “savings problem.” We suggest a comprehensive review and additional consultations with Ontario’s employers and employees to settle the debate. That said, Ontario’s proposal to increase income thresholds for the low-income seniors’ benefit seems to contradict its objective of maintaining peoples’ living standards during retirement. For single seniors, the income threshold is increasing from $16,018 to $19,300; for couples, the threshold is rising from $24,175 to $32,300.

What didn’t make the cut?

Notably absent from the Budget was a discussion on how the government itself could embrace innovation. The Basic Income pilot project is a different approach to policy design, but more can be done. Other than a few pages discussing Ontario’s plan to expand digital government and modernize ServiceOntario, a discussion on how government could improve how it designs, engages, and delivers public services is lacking. Moreover, the document is 346 pages of disorganized information. How does this promote open government?

In Working Paper 24, Licence to innovate, we discuss why the government of Ontario should innovate and how to do it. We suggest integrating innovation, revising funding frameworks, advancing human resource management, streamlining services, and monitoring innovation. Doing so can build effective and efficient public services for today and tomorrow.